Question

Evergreen Company sells lawn and garden products to wholesalers. The company's fiscal year-end is December 31. During 2021, the following transactions related to receivables occurred:

Feb.		28		Sold merchandise to Lennox, Inc., for $18,000 and accepted a 8%, 7-month note. 8% is an appropriate rate for this type of note.
Mar.		31		Sold merchandise to Maddox Co. that had a fair value of $11,960, and accepted a noninterest-bearing note for which $13,000 payment is due on March 31, 2022.
Apr.		3		Sold merchandise to Carr Co. for $11,000 with terms 3/10, n/30. Evergreen uses the gross method to account for cash discounts.
		11		Collected the entire amount due from Carr Co.
		17		A customer returned merchandise costing $4,900. Evergreen reduced the customer’s receivable balance by $6,700, the sales price of the merchandise. Sales returns are recorded by the company as they occur.
		30		Transferred receivables of $67,000 to a factor without recourse. The factor charged Evergreen a 2% finance charge on the receivables transferred. The sale criteria are met.
June		30		Discounted the Lennox, Inc., note at the bank. The bank’s discount rate is 10%. The note was discounted without recourse.
Sep.		30		Lennox, Inc., paid the note amount plus interest to the bank.

Required:
1. Prepare the necessary journal entries for Evergreen for each of the above dates. For transactions involving the sale of merchandise, ignore the entry for the cost of goods sold.
2. Prepare any necessary adjusting entries at December 31, 2021. Adjusting entries are only recorded at year-end.
3. Prepare a schedule showing the effect of the journal entries on 2021 income before taxes.

Answer 1

Q1. According to the question, first we need to record the transactions of Evergreen company in Journal:

Evergreen Company Journal Entries
Date	Particulars	Debit Amount($)	Credit Amount($)
2021
Feb-28	Notes Receivable a/c To Sales Revenue a/c (To record the sale of merchandise)	18,000	18,000
Mar-31	Notes Receivable a/c To Discount on Notes receivable To Sales Revenue a/c (To record the sale of merchandise)	13,000	1,040 11,960
April-3	Accounts Receivable a/c To Sales Revenue a/c (To record sale of merchandise to Carr Co.)	11,000	11,000
April-11	Cash a/c Sales Discount a/c(11,000*3%) To Accounts Receivable a/c (Collected amount from Carr Co.)	10,760 330	11,000
April-17	Sales Returns a/c To Accounts Receivable a/c (To record Sales returns)	6,700	6,700
April-30	Cash a/c (67,000*98%) Loss on sale of Receivable a/c(67,000*2%) To Accounts Receivable a/c (Transferred receivables to a factor without recourse)	65,660 1,340	67,000
June-30	Interest Receivable a/c To Interest Revenue a/c(18,000*8%*4/12) (To Record Interest Receivable)	480	480
Aug-31	Cash a/c(*wn.1) Loss on sale of Note Receivable a/c To Interest Receivable a/c To Note Receivable a/c (Paid the note amount plus interest to the bank)	18,369 111	18,000 480

Working Notes:

1. Calculation of Loss on sale of Note Receivable a/c balance on August 31= Face Value+Interest- Discount

18,000+(18000*8%*7/12)= $18,840

=$18,840- (18,840*10%*3/12)= $18,369

Loss on sale of Note Receivable = $18,480- $18369= $111

2. If on April 17, the cost of Goods sold entry is reciorded, then the entry will be:

Date	Particulars	Debit Amount($)	Credit Amount($)
April 17	Inventory a/c To Cost of Goods sold a/c	4,900	4,900

Q2. Next, we need to prepare the Adjusting Entries:

Date	Particulars	Debit Amount($)	Credit Amount($)
Dec-31	Discount a/c (1040*9/12) To Interest Revnue a/c	780	780

Q3. Next, We need to prepare a schedule showing the effect of the journal entries on 2021 income before taxes:

Date	Income Increase(Decrease)
Feb-28	18,000
Mar-31	11,960
April-3	11,000
April-11	(330)
April-17	(6,700)
April-17(wn-1)	4,900
April-30	(1,340)
June-30	480
Aug-31	(111)
December-31	780
Total Effect-	38,639